3 Reasons This 7% Yield Is Safehttp://www.fool.com/investing/general/2014/03/24/3-reasons-this-7-yield-is-safe.aspx Chad Henage
March 24, 2014
It's not every day that you come across a stock with a 7% yield. With CD and bond yields near record lows, income hungry investors would love to find a company that could sustain this type of payout. Ironically, the company these investors should consider is CenturyLink (NYSE: CTL) which was forced to cut its dividend last year. In fact, there are at least three reasons to believe that this yield is safe and could potentially grow once again.
Sometimes it really is this simple
CenturyLink and Frontier both separate their businesses into residential and business divisions. AT&T of course divides its results into wireless and wireline. The good news for CenturyLink is no matter how you cut it, the company is doing better than these competitors when it comes to consumer and business revenue.
This brings us to the first reason CenturyLink's 7% yield is safe, the company's consumer revenue decline is improving. In the current quarter, the company reported consumer revenue declined by 1.7% compared to a 1.6% decline at Frontier and a 3.4% overall wireline decline at AT&T.
More importantly, CenturyLink's consumer revenue decline was smaller than last quarter's 2.1% drop. Though this improvement doesn't sound like much, in an industry where voice line losses are rampant, getting closer to breakeven is a big accomplishment.
CenturyLink's business performance was even more encouraging. The company reported business revenue increased 1%, compared to a 4% decline at Frontier and again the more than 3% decline from AT&T. As the company's business revenue continues to grow, and its consumer losses flat line, the company could deliver overall revenue growth. To sustain the dividend, real top-line growth is critical.
Stability is key
While AT&T's wireline margin is just 10%, the comparison is a bit unfair because the company is heavily focused on its wireless business. That being said, the second reason CenturyLink's dividend looks safe is the company's operating margin seems to have stabilized. In fact, the company reported the same 14.8% operating margin in the prior quarter as it did in the last three months. Combined with the potential for real revenue growth, this would provide growth in net income to help support the dividend.
A painful past, but a brighter future
However, CenturyLink was just facing reality. The company had been using up its tax benefit from prior losses, and with this reversal needed to make a hard decision. The good news is,